EMERGING MARKETS-Brazil rates rise on higher-than-expected inflation

Wed Jan 23, 2013 9:07am EST

* Brazil consumer inflation above all estimates in a Reuters poll

* Interest-rate contract maturing Jan 2015 hits 1-1/2 month high

* Yield curve steepens in sign of future inflation problems

By Walter Brandimarte

RIO DE JANEIRO, Jan 23 (Reuters) - Brazil's interest-rate contracts rose on Wednesday after data showed consumer inflation started the year well above market estimates, suggesting the central bank may be forced to raise interest rates down the road.

The domestic yield curve steepened, with the interest rate contract maturing in Jan 2015 hitting its highest level since the end of November, after data showed the benchmark IPCA consumer price index rose 0.88 percent in the month to mid-January.

Economists expected the index to climb 0.83 percent, according to the median of 31 estimates. The highest forecast was for a 0.87 percent rise.

The contract maturing Jan 2016 climbed 3 basis points to 8.42 percent.

"The yield curve is steepening further. Medium- and long-term rates are rising. That's because we don't see any change in monetary policy in the short term, but inflation problems are piling up," said Silvio Campos Neto, an economist with Tendencias, a consultancy in Sao Paulo.

Brazil's central bank is widely expected to leave the base Selic rate at its current all-time low of 7.25 percent for a "prolonged period" as it tries to boost a faltering economic recovery without adding to inflation pressures.

But many economists fear that low interest rates alone will do little to support Brazil's growth, while fueling inflation that already runs well above the center of a 4.5 percent government target -- which includes a tolerance margin of 2 percentage points.

Tendencias currently forecasts Brazil's consumer inflation to close 2013 at 5.8 percent. "But there are upside risks to that forecast," said Campos Neto.

With an expected increase in fuel prices in the next few weeks, Brazil's inflation will likely remain under pressure in the next couple of months.

But members of President Dilma Rousseff's economic team estimate it will then start to gradually ease, converging to the center of the government target "in a more linear way."

Such a forecast has still not convinced analysts, however.

"That sounds like a very optimistic scenario, considering all the factors we have seen," said Tendencias' Campos Neto.

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